Donald Trump’s Presidential win has obviously come as a major surprise to most pollsters and analysts. Even as late as Monday, consensus estimates only gave Trump a 30% chance of victory. Similar to the Brexit vote in June, analyst estimates were simply wrong.
Over the past month, I have spent significant time researching the potential economic and market effects of a Trump presidency. I base this analysis on campaign statements made by Trump himself during the campaign, as well as historical relationships between various asset classes.
In the short-term, markets will be volatile as this news is digested. The Trump presidency will bring a major shift in economic policy and the impact of this shift will take time to develop. Early this morning, the Dow futures were down as much as -750 points, yet as I write this around lunchtime, the Dow is up +165 points. Rarely have we seen such wild swings in markets in such a short time. Unfortunately, volatility may become the norm for the short-term future.
In the near-term, the Federal Reserve raising interest rates in December is increasingly unlikely.
I believe a Trump presidency will have the following effects:
- The US Dollar will weaken vs. the Euro and numerous Emerging Market currencies
- Commodities investments should do well
- Materials, Defense & Aerospace, and Infrastructure sectors should benefit
- Precious Metals and Mining companies should also perform well
- Oil Producers and Coal companies should benefit and Alternative Energy companies might not
- Interest rates should tick higher, particularly for long-term bonds
- Companies that manufacture domestically and sell internationally should benefit
- Consumer Discretionary and Healthcare sectors might continue to struggle
Markets will be negotiating an enormous amount of uncertainty during the next few months. Volatility is likely to rise and remain elevated until long-term economic fundamentals reassert themselves.
Trump is the greatest anti-establishment winner in American political history. His administration will bring a tectonic shift in economic policy. Since the establishment fought him every step of the way, it is not inconceivable that he will seek revenge. In any event, he owes them nothing and their interests will undoubtedly be sacrificed for Trump supporters who want higher wages and a reversal of many past policies. Like FDR before him, it is in Trump’s interest to have the country, the markets and the U.S. dollar in the worst possible shape before he takes office next January.
If trade imbalances are at the top of his concerns then he is likely to ‘talk’ the U.S. Dollar down to get the attention of America’s largest trade surplus partners. And if Trump doesn’t do this, the outgoing administration will do what they can to create chaos in the economy to make his job of undoing the “legacy” (Obamacare, etc.) all the harder.
The addition of inflation-sensitive assets that we have implemented over the past 3 months should do well in the near-term environment. We believe that the coming months will provide numerous opportunities to place investments in beaten-down sectors with good long-term potential.
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